In early December 2025, the Indian Rupee (INR) breached the ₹90 per US dollar mark for the first time in history and continued to fall for seven consecutive trading sessions, touching a new low of ₹90.4370 per USD.
With a 5.3% year-to-date depreciation, INR has become Asia’s worst-performing currency in 2025 and is staring at its sharpest annual decline since 2022.
However, experts caution that a falling rupee does not necessarily reflect a weak Indian economy. Instead, the depreciation is largely being driven by external shocks, temporary policy uncertainties, and global market behaviour.
1. Why is the Indian Rupee Depreciating?
According to Dr. Soumya Kanti Ghosh (Group Chief Economic Adviser, SBI Research), three major factors—or what he calls a “trifecta of pressures”—are responsible:
1.1 Policy Uncertainty: Delay in India-US Trade Deal
The US announced sweeping tariff hikes in April 2025.
India faces a 50% tariff—the highest among major economies (China 30%, Vietnam 20%, Indonesia 19%, Japan 15%).
This has created:
uncertainty in export earnings,
lower investor confidence,
pressure on the rupee.
Around $45 billion worth of Indian exports—mainly labour-intensive sectors—are expected to be hit.
1.2 FPI Outflows
Foreign Portfolio Investors (FPIs) have been selling Indian equities after two strong years of inflows.
Outflows reduce dollar supply in India → rupee weakens.
FPIs are shifting to US markets due to:
higher US interest rates,
strong dollar index,
risk aversion in emerging markets.
1.3 RBI’s Non-Interventionist Stance
Unlike earlier episodes, RBI is not aggressively selling dollars to defend INR.
RBI’s approach:
intervene only to control excessive volatility,
avoid targeting a fixed exchange rate.
This hands-off stance allows market forces to play a larger role, resulting in sharper short-term depreciation.
1.4 Offshore NDF (Non-Deliverable Forward) Market Influence
The offshore NDF market has become more influential.
Traders bet on future rupee movement, causing:
speculative pressure,
faster rupee depreciation.
1.5 Strengthening of the US Dollar
A stronger dollar index (DXY) typically weakens emerging market currencies.
Dollar strength in 2025 is driven by:
strong US job data,
higher interest rates,
global uncertainty → “flight to safety”.
2. Why Experts Say the Falling Rupee is Not a Serious Concern
Despite sharp depreciation, experts argue that the rupee remains fundamentally stable and resilient.
2.1 India’s Trade Deficit is Not Worsening Alarmingly
For April–October 2025, the goods and services deficit was $78 billion, only slightly higher than last year’s $70 billion.
This means:
India’s external sector remains stable,
the negative trade narrative is being overplayed by markets.
2.2 Rupee is Among the Least Volatile Currencies
Since April 2025, the rupeee has depreciated (~5.5%) the most among major economies.
But its volatility index (~1.7%) shows it remains one of the most stable currencies.
This means:
the rupee is sliding gradually, not fluctuating unpredictably,
financial markets remain orderly.
2.3 Depreciation is Largely External, Not Domestic Weakness
Factors like:
tariffs,
global dollar strength,
portfolio outflows
are external.
India’s fundamentals—growth rate, forex reserves, banking system—remain strong.
3. Broader Context: Why Currencies Depreciate
A currency like the rupee falls when:
Demand for USD rises (imports, debt repayments, FPI outflows).
Supply of USD decreases (lower export earnings).
Global investors prefer safer assets (like US treasuries).
Speculation increases in forex markets.
Depreciation is a normal part of market-driven economies.
4. Is Rupee Depreciation Always Bad?
Not necessarily.
Possible Advantages
Boosts exports (Indian goods become cheaper abroad).
Encourages tourism inflow.
Makes India’s IT services more competitive.
Possible Disadvantages
Costlier imports (especially crude oil).
Higher inflation.
Pressure on companies holding foreign debt.
For India, the impact depends on how long and how sharply the fall continues.
5. UPSC Perspective: Key Takeaways
Mains (GS-III)
Exchange rate volatility reflects global uncertainties, not necessarily domestic weakness.
RBI’s calibrated intervention strategy supports long-term stability.
Trade wars and tariffs have direct currency implications.
FPI flows are highly sensitive to global interest rates.
Essay
“Currency depreciation as a mirror of global power shifts”
“Managing external sector vulnerabilities in emerging economies”
Interview
Be prepared to explain:
Why the rupee is falling,
Whether depreciation is harmful,
How India can respond (diversify exports, deepen FTA network, maintain forex buffers).
Conclusion
The recent depreciation of the Indian Rupee to an all-time low is largely the outcome of external shocks, geopolitics, and global financial trends, rather than domestic economic weakness.
While the fall appears steep, India’s low currency volatility, stable trade deficit, and strong macroeconomic fundamentals indicate resilience.
For UPSC, the key understanding is that exchange rate movements must be examined in a holistic global context rather than through a narrow lens of domestic economic strength.
